The Secret Behind Target-Date Fund Growth

Are investors really so enthralled with target-date mutual funds, or are we all just lazy?

That’s the question I posed to Stephen Utkus, director of Vanguard Group’s Center for Retirement Research.

Vanguard this week released some new data on investors in its 401(k)-plan target-date funds, which are funds with a mix of assets – stocks, bonds and cash – that are designed to grow more conservative as a specific date, usually retirement, approaches.

According to Vanguard, the number of its 401(k) participants that invest solely in target-date funds has exploded recently, increasing six-fold over the past five years, to 768,000. The company surveyed 3.2 million of its 401(k) participants to gather the data.

Vanguard is among the three asset managers with the highest number of target-date fund assets. It manages $100.8 billion spread across 12 funds.

The reason why investors like target-date funds, explains Utkus, is because they are easy. You don’t have to worry about creating your own mix of investments.

“You’re buying a simple way to invest, and that’s much easier then assembling a portfolio of 25 fund options,” he says.

But back to the question of laziness. Target-date funds have seen a lot of growth in part because employees are typically enrolled into the funds automatically. That means investors aren’t necessarily favoring the product on their own.

At Vanguard, 77% of all its 401(k) plans have selected a target-date or balanced fund as a default investment.

“Individuals are inattentive,” says Utkus, who tactfully refrained from using the adjective “lazy.” “They’re subject to inertia.”

Still, he points out that some fund investors opted into the plans on their own, without the help of their employers, according to Vanguard’s research.

That’s not to say target-date funds are risk-free. In 2011, the average fund with about four years until its target date fell 0.4%, trailing the Standard & Poor’s 500-stock index, The Wall Street Journal recently reported.

“They’re like any investment portfolio,” Utkus says. “They fluctuate with the markets.”